New Mortgage Insurance Bill Could End Unnecessary Overpayment

Nation's Housing

July 25, 1998|By KENNETH R. HARNEY Columnist

After more than two years of haggling, the Senate and House recently passed legislation designed to reform one of the mortgage industry's longest-running consumer abuses - the routine overpayment of private mortgage insurance premiums by unwitting homeowners.

The final compromise bill creates a new, nationwide system of consumer disclosures, and requires most private mortgage insurance (PMI) policies to be terminated automatically when the loan balance declines to 78 percent of the original property value of the home.

Homeowners with good payment histories whose loan balances hit 80 percent of the original property value will be able to request voluntary termination of PMI coverage by their lender. But some borrowers whose loans are deemed ``high risk'' may not be able to get rid of PMI payments until the halfway point of the full mortgage term, no matter how faithfully they pay.

A major disappointment of the compromise bill from a consumer perspective: The reforms won't take effect until one year from the date President Clinton signs the bill into law. In the meantime, many borrowers will be stuck with the status quo, unless they can persuade their lender to voluntarily drop PMI coverage. Even after the effective date, only newly written PMI policies will be covered by the automatic termination provision. Federal Housing Administration (FHA) mortgage insurance is not affected by the new law.

Here's a quick overview of what the bill will do, and why the problem needed fixing in the first place. Private mortgage insurance is required by most home lenders when a borrower makes a downpayment of less than 20 percent. Paid for by the borrower, the insurance protects the lender against financial loss in the event of default or foreclosure.

Roughly 5 million American homeowners currently pay PMI premiums on $546 billion worth of real estate. Premiums depend on the size, type and perceived risk of each loan, but generally run from $500 to $1,200 a year. Lenders face only a relatively small likelihood of loss from a default whenever a homeowner has a 20 percent or greater equity stake in the property. Yet for years, thousands of borrowers have continued to pay for PMI even when their equity is 25 percent, 30 percent and higher.

Why? Because no one ever told them they might be able to get their PMI policies canceled. Some major mortgage investors, such as Fannie Mae and Freddie Mac, permitted cancellation under certain circumstances. But they never sought to communicate their policies to the borrowing public. Now Congress, adopting an approach first advocated by Senate Banking Committee Chairman Alfonse D'Amato, R-N.Y., will require lenders to terminate PMI automatically, and to explain their cancellation procedures to their customers upfront at loan closing.

Under the reform bill, borrowers with good payment records will be able to request cancellation of PMI when their principal balance has been paid down to 80 percent of the original property value of the house. If their lender has a written policy permitting cancellation, they may be able to demonstrate their 20 percent or greater equity stake by submitting an appraisal.

Automatic termination of PMI will occur for most borrowers when their loan balance has been amortized down to 78 percent of the original property value. For homeowners with low-downpayment loans defined as ``high risk'' by Fannie Mae and Freddie Mac, automatic termination won't occur until midway through the loan's life - 15 years for a 30-year mortgage, for example.

A key new consumer protection in the bill: Mandatory procedures for refunds of ``unearned'' insurance premiums. Lenders or servicers will have 45 days after termination of PMI to repay all premiums they collected from the borrower for coverage beyond the termination date.

Borrowers should also be better equipped to understand PMI once the new rules go into effect. At loan closing, they'll receive an amortization schedule pinpointing the automatic termination date for PMI on their loan. They'll also be told the date on which they'll be able to request voluntary cancellation of PMI. All borrowers, including those with existing PMI accounts, will also receive annual disclosures about their servicer's cancellation procedures.

In the 12 months between now and the effective date of the new legislation, how should the 5 million homeowners with PMI policies handle cancellation questions? For starters, they should check to see whether they are covered by state consumer protection laws. Eight states - California, Connecticut, Maryland, Massachusetts, Minnesota, Missouri, New York and Texas - have PMI disclosure or cancellation statutes on the books. Second, if your loan is owned by Fannie Mae or Freddie Mac, you may be eligible to request cancellation when your equity stake hits 20 percent.

Other lenders are likely to begin liberalizing their approach to cancellation during the coming months as well, to keep customers happy. If you're eligible for cancellation under the new federal rules, you may be able to convince your lender to give you a break - even though the federal law doesn't kick in officially until next summer.